Two important political developments in the UK over the last week have raised new questions about the Brexit outlook. While there’s still time for a compromise to be reached, we think the risk of the UK leaving the EU without a deal has increased.

Last week’s dramatic events were not entirely unexpected. First, Prime Minister Theresa May announced that she is stepping down. Second, the newly formed Brexit Party cantered to victory in European parliamentary elections. Now, the key question is how these events impact our thinking on Brexit and the broader UK political backdrop.

May’s Departure Resolves Nothing

May’s resignation is not a gamechanger, in our view. The prime minister has been widely condemned for her handling of the Brexit process but that’s not the main reason why negotiations have failed so far. The bigger obstacles have been the refusal of key stakeholders to compromise— including the hard-Brexit and Remain wings of the Conservative Party, Labour MPs and the EU—as well as the failure to find a solution to the Irish border backstop. Neither problem has gone away.

The European election results will make it even more difficult to reach a compromise. The success of Nigel Farage’s Brexit Party (31% of the vote) means it is now imperative for the Conservative Party to deliver Brexit (almost regardless of what it looks like) before facing the electorate again. Meanwhile, five pro-EU parties won a combined 40% of the vote, adding to pressure on the Labour Party to support a second referendum.

New Prime Minister to Face Big Constraints

What happens next? The Conservative Party must choose a new leader, a process that will probably take six to eight weeks. Boris Johnson, one of the leaders of the Brexit campaign, is strongly favored to win this vote and become Britain’s next prime minister—though Tory leadership contests have a long history of delivering unexpected results (May, John Major and even Margaret Thatcher were not initially expected to win). Whoever wins, we can be sure of two things. First, the successful candidate will take a more aggressive stance on Brexit than May. Second, the new prime minister will face several formidable constraints:

  • The Parliamentary arithmetic has not changed. Most MPs still favor either a soft Brexit or no Brexit at all and will therefore continue to resist a no-deal Brexit.
  • The government has a working majority of just six seats. The defection of a handful of disaffected Tory MPs would prompt the government’s collapse.
  • Rising support for the Brexit Party means it will probably be too risky for the new prime minister to call a general election before delivering Brexit.
  • Despite rising support for a second referendum, there is still no majority for this in Parliament.
  • There is no guarantee that the Remain camp would win a second referendum (it’s not even clear what the question would be). The European elections and recent opinion polls suggest that Remain is narrowly ahead but that was also the case shortly before the 2016 referendum.